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Mobile phone prices to rise as VAT law enacted

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A woman talks on her mobile phone. Handset makers fear the tax on mobile phones will hurt sales. FILE

A woman talks on her mobile phone. Handset makers fear the tax on mobile phones will hurt sales. FILE 

By DAVID HERBLING

Posted  Wednesday, August 21  2013 at  19:31

In Summary

  • Handset prices will now go up by at least 16 per cent, an equivalent of new tax requirement, a move the firms say will hamper the transition from feature phones to smartphones.
  • The handset makers fear the tax on mobile phones will hurt sales and slow down Kenya’s mobile penetration which currently stands at 75.8 per cent.
  • The new law paves the way for the taxation of previously exempted goods such as mobile phones, text books, computer hardware and software.
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Mobile phone manufacturers have said they will pass the new cost introduced through the VAT Act 2013 to consumers, days after President Uhuru Kenyatta assented to the law.

Handset prices will now go up by at least 16 per cent, an equivalent of new tax requirement, a move the firms say will hamper the transition from feature phones to smartphones. They say the law assented to on August 14 with commencement date yet to be specified will decelerate uptake of digital content.

The handset makers fear the tax on mobile phones will hurt sales and slow down Kenya’s mobile penetration which currently stands at 75.8 per cent.

“Higher mobile phone prices will act as a barrier to entry and lead to slower penetration growth,” said Jussi Hinkkanen, Nokia vice-president in charge of corporate relations in India, Middle East and Africa.

“It offers short-term revenues for the government but in the long run, tax benefits which would have originated from accelerated economic performance related to higher penetration will be foregone.”

The new act paves the way for the taxation of previously exempted goods such as mobile phones, text books, computer hardware and software.

For example, the price of an entry-level smartphone such as the Ideos Ascend Y-100 which currently retails at Sh5,999 will go up by Sh960 to Sh6,959.

Mr Kenyatta, during his tenure as Finance minister, exempted mobile phones from VAT in the 2009 Budget speech as a strategy to deepen use of mobile phones and related services such as mobile money, m-commerce and apps development.

The government initially hoped to raise Sh10 billion annually from the enactment of the law that has since been watered down.

“Mobile telephones have become essential aspect of our daily communication and transaction system. To make the telephone sets more affordable to wananchi and expand the subscription base, I propose to exempt from VAT, all telephones, for cellular networks or other wireless networks,” said Mr Kenyatta on June 11, 2009.

The International Monetary Fund has since pushed for a vast scale-down of zero-rated and exempt goods to raise tax and reduce the administrative cost.

The VAT tax break resulted in Kenya’s total mobile subscribers almost doubling to 29.8 million users as at March this year from 17.4 million in June 2009, data from the Communication Commission of Kenya show.

Studies by the World Bank show that a 10 per cent growth in mobile subscription yields an estimated 1.2 per cent growth in GDP across the economy.

herbling@ke.natiomedia.com